Solicitors hold money in client account on trust for their clients until they pay it out in accordance with their instructions. Therefore, a solicitor who parts with client money, without authority, before completion of a conveyancing transaction, commits a breach of trust. Some lenders have taken advantage of these rules, by framing claims against solicitors in equity in order to sidestep common law rules that restrict the damages payable for negligence and breach of contract.
AIB Group (UK) plc v Mark Redler & Co [2012] EWHC 35 (Ch) concerned a claim that solicitors had acted in breach of trust as a result of an oversight during a re-mortgage transaction, which led to an underpayment to an existing lender. The existing lender refused to discharge its charge until it received the outstanding balance in the sum of £309,000. Consequently, the new lender had to settle for a second legal charge. In due course, the borrower defaulted on the new loan and the property, which had been valued at £4.25m, was eventually sold for £1.2m.
The bank relied on the fact that the solicitors had held the mortgage advance on trust to use in accordance with its instructions. The solicitors had negligently paid too little to the existing lender and too much to the borrower and had failed to secure the first legal charge that they had been instructed to obtain. Consequently, they had parted with the money in breach of trust and were liable to reconstitute the whole of the trust fund, in the sum of £3.3m (less the proceeds received from the sale of the security).
The trial judge agreed that the solicitors had committed a breach of trust insofar as they had paid money away without the lender’s authority. He ruled that the overpayment to the borrower was unauthorised and in breach of trust, and that the solicitors were liable to reconstitute the trust fund to that extent.
The Court of Appeal took a different view. It held that there can be no “completion” of a re-mortgage transaction for the purposes of a claim for breach of trust unless, before releasing the mortgage advance, the lender’s solicitor receives either a solicitor’s undertaking or unconditional confirmation from the existing lender that they will use the money received to redeem the existing charge(s).
A finding of a partial breach of trust was a contradiction in terms. If a transaction has completed, the trust ends, and a finding of breach of trust in respect of part of the mortgage advance is inconsistent with that. However, the law of equity is able to recognise and compensate the beneficiary for the loss actually flowing from a breach of trust. The lender would still have been exposed to the losses caused by the borrower’s default, had the re-mortgage been properly completed and the existing charge redeemed, but would have had security for an additional chunk of its loan. Therefore, the solicitors’ liability was limited to the value of the security lost as a result of their negligence.
The underpayment here arose because a mortgage redemption figure was obtained on the telephone and related to only one of two accounts. The Council of Mortgage Lenders’ advice concerning multiple accounts can be found here: http://www.lawsociety.org.uk/productsandservices/goodpractice/conveyancing/annex25h.page
Allyson Colby is a property law consultant
